LONG BEACH, CA—The Long Beach multifamily market is experiencing “unprecedented growth,” according to Robert Stepp, the president of Stepp Commercial and an expert in the Long Beach multifamily sector. The market had a nearly 40% year-over-year increase in transaction volume in 2014 over 2013, and increased per-unit prices. To find out exactly what is happening in the market, what is driving this growth and what we can expect in 2015, we sat down with Stepp to gain some of his market knowledge. Here is what we found out:

GlobeSt.com: Can you give me a snapshot of the Long Beach multifamily market?

Robert Stepp: The bottom of the market was in early 2010 and since that time we have been witnessing unprecedented growth. The overall transaction volume in 2014 showed a surprising surge of 39.8% compared to total sales in 2013. The dollar volume of these 2014 trades also significantly surpassed 2013 reaching the highest amount in over a decade with a 28% increase over the previous year. Additionally, cap rates reached lows in 2014 averaging about 5.49%, which is 42 basis points lower than 2013. The average price-per-unit is $125,885, up more than 9% from $115,234 per unit in 2013. 

GlobeSt.com: What are some of the emerging submarkets in the area?

Stepp: This year, the A and B submarkets should continue to perform well due to a lack of inventory and high investor demand. These top tier areas include Belmont Shore and Belmont Heights which are selling at the highest price-per-square-foot we have ever seen. To that point, I just closed a small deal at a record $440-per-square-foot in Belmont Shore, just six months prior, a very similar property down the street sold for $340-per-square-foot. The East Village Arts District in Downtown Long Beach is another hot submarket seeing a huge amount of growth and revitalization. As a result, it has a high demand for housing as this area provides an eclectic mix of retail, dining, entertainment and art.

GlobeSt.com: What is driving demand for multifamily housing in Long Beach?

Stepp: In addition to the job growth in Long Beach as well as Los Angeles County as a whole, one of the major factors that makes Long Beach an attractive location for investors is that it is a non-rent controlled market in a very pro-business city. The City of Long Beach encourages investors to renovate multifamily properties with programs that provide cash incentives for improving the exteriors. These incentives give owners the opportunity to add value and maximize a property's intrinsic value. I see a lot of investors seeking better yields that are coming from markets with city ordinances requiring rent controls such as Santa Monica, Beverly Hills and other Los Angeles cities.

GlobeSt.com: What investor types are finding deals in this market, what are they looking for, and what is a typical multifamily sale like?

Stepp: The majority of buyers are private investor types from Southern California that are seeking strong cash-on-cash returns. The Long Beach market is able to offer properties with an opportunistic play as a significant portion of the multifamily sector was built decades ago and could use some degree of updating, which is appealing to these entrepreneurs. With interest rates low, about 80% of the buyers I work with are utilizing financing to enjoy yields with good leverage. Typically, investors can garner 7 to 9% cash-on-cash returns in one year post-renovation. Once that occurs, they tend to hold long-term. The sale process is pretty competitive within A and B areas, and I see anywhere from eight to 12 offers. 

GlobeSt.com: Is there a lot of multifamily development in the market, and if so what property types are in demand?

Stepp: The concentration of new development and adaptive reuse projects is in Downtown Long Beach with more than 1,000 for-rent units currently under construction. The majority of these are being built as one- and two-bedroom units. Three luxury high-rise projects of note include: The Edison is a 156-unit high-rise adaptive reuse loft-style apartment project set to complete the second quarter of 2015; Parc Broadway, a seven-story project with 222 units and retail targeted for completion in early 2017; and the largest new development in the East Village Arts District area of Downtown, The Current at Shoreline Gateway, a 17-story mixed-use project that will include 223-apartment units and retail set to open in early 2016.

GlobeSt.com: Where do you see the market heading in the next year?

Stepp: The market will continue to do well in A and B areas, while C area values will start to plateau. I see less velocity this year because sellers are enjoying robust cash flow due to strong occupancy and overall rent levels. The fundamentals are there for a continuing recovery in Long Beach and revitalization throughout the market. Overall apartment vacancy is less than 2% and rental rates continue to do well and are reaching higher levels every quarter in the A and B areas. A nicely upgraded one-bedroom in Belmont Shore can rent for $1,700- $1,900 a month which is certainly an example of a new rent level. With these sorts of rents, investors are making $20,000-$25,000 in unit renovations for a one-bedroom apartment in order to achieve premium pricing.